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Step by step, the money is going wild or will be determined in mid-July
**Summary**
Things are far from over. From banks and investment institutions to the National Development and Reform Commission, the Ministry of Industry and Information Technology, and other relevant departments, all are waiting for the next steps in policy decisions. On June 28, reports from various ministries indicated that the central bank is leading a joint effort with other agencies to explore ways to revitalize the stock of funds and guide financial support toward the real economy.
A discussion paper on financial support for the real economy will be issued by the State Council in the near future after collecting opinions from relevant departments. The State Council will also hold a press conference to announce the findings.
An official from the Finance and Development Department of the National Development and Reform Commission told the *Economic Observer* that the relevant departments are working according to the State Council's instructions to further study and implement policies. They have realized that excessive imbalance between the financial and real economy could trigger a crisis similar to the one seen in the U.S.
The Ministry of Industry and Information Technology is also awaiting specific operational measures from the central bank and the China Banking Regulatory Commission. Officials from the ministry noted that monetary policy alone may not be sufficient to solve real economy issues, and the next step should involve fiscal and tax policies. Meanwhile, the Ministry of Commerce is expecting exchange rate policies to support exports. At a time when the RMB exchange rate reached equilibrium, there were challenges in reaching a consensus on further exchange rate reforms.
The mid-July State Council meeting will be a key moment. An official from the Economic Operation Monitoring and Coordination Bureau of the Ministry of Industry and Information Technology said that all ministries are conducting mid-year research and analysis in preparation for the meeting. This meeting will determine where the “money shortage†discussed last week will be directed through policy.
According to the same official, after increasing tolerance for economic slowdown, it was decided whether to relax or continue tightening conditions, based on the impact of the real economy on employment. As long as employment remains stable, the policy of “revitalizing the stock of funds†will not be relaxed.
However, some officials are concerned that if financial policy fails to support the real economy, it could worsen asset bubbles. The ultimate cost would be a continued decline in the real economy. Once China’s large real economy enters a downturn, it would be very difficult to reverse.
**Revitalize the Adventure of the Brave**
In the week following the State Council executive meeting’s announcement of the principle of “optimizing the allocation of financial resources, using incremental growth and revitalizing the stock,†commercial banks, capital markets, and the central bank jointly engaged in a game of jumping on a springboard. This tested each party’s resilience. Ultimately, the central bank’s “concession†ended the market panic. At the same time, the China Banking Regulatory Commission is drafting a specific plan for adjusting the financial support structure, refining each draft document. A document supporting financial restructuring aligned with the “three lines of meetings†will be released soon.
As early as April, the China Banking Regulatory Commission issued guidance requiring the banking industry to support domestic demand, energy conservation, environmental protection, and agriculture in 2013. These State Council documents align with the earlier guidance.
In response to the central bank’s actions, sources close to the central bank told the *Economic Observer*: “The central bank’s main focus is not to directly release liquidity into the market, but to provide window guidance to large banks with ample liquidity, allowing them to transfer funds to smaller banks with tight capital. This helps stabilize high market interest rates. However, this also shows a controlled and opportunistic regulatory approach.â€
According to officials from the National Development and Reform Commission, “The central bank’s statement aims to stabilize market psychology and guide expectations, not to truly relax. The determination to adjust the structure is clear.â€
The “revitalized stock†statement has sparked speculation that financial institutions might freeze liquidity. However, years of excess liquidity have led to widespread mismatches among banks.
Data shows that social financing in January–May 2013 totaled 9.11 trillion yuan, 3.12 trillion yuan higher than the same period last year. In May alone, social financing reached 1.19 trillion yuan. Among these, RMB loans increased by 667.4 billion yuan, up 125.8 billion yuan year-on-year. Entrusted loans rose by 196.7 billion yuan, an increase of 175.2 billion yuan, while trust loans increased by 99.2 billion yuan, up 43.5 billion yuan. These figures suggest that China has invested more than planned at the start of the year, with much of the funding not entering the real economy directly.
At the end of the first quarter of this year, interbank assets in China reached 32 trillion yuan, accounting for 23% of total assets, up 28% compared to the same period last year. The interbank market has become the best channel for financial institutions, including China’s four major banks, to expand assets and achieve high returns. Recently, insurance funds have also joined the capital arbitrage game, redeeming money market funds to invest in high-yield bank wealth management products.
Liao Qiang, a senior director at Standard & Poor’s, believes it is difficult to predict the consequences of the current central bank policy. This will force commercial banks to pay more attention to liquidity management and increase liquidity, which could lead to a reduction in interbank and wealth management businesses. This process may result in reduced credit supply and bad debts for some high-risk companies reliant on shadow banking credit. Additionally, business deleveraging itself will reduce banks’ profitability opportunities.
Liao Qiang said: “If the central bank lacks sufficient communication with the market when implementing policy tightening on interbank and wealth management businesses, and the duration is long, it may lead to rising credit interest rates in the real economy, which could negatively impact economic growth during the year.†He believes that although the new policy faces pressure, phenomena such as deteriorating bank asset quality and profitability may occur, but it will not cause bank runs. He estimates that the NPL ratio may rise to 3% in 2013.
Zhu Haibin, chief economist at JPMorgan China, also warned about the potential rise in borrowing interest rates. According to Zhu, once borrowing interest rates rise, it means monetary policy is effectively tightened, which would add more pressure to the already weak real economy. Moreover, even if funds shift from the financial sector to the physical sector, how to ensure they flow into the key sectors and industries the government wants to support remains a thorny issue for policymakers.
**Distorted Credit Structure**
An authoritative source close to the central bank explained the “revitalized stock†concept to the *Economic Observer*: “One is to adjust the credit structure. Currently, commercial banks have a loan balance of 60 trillion yuan. Each year, 20 trillion yuan is due, which can be used as a pivot for structural adjustment. Asset securitization can also be used to transfer credit assets and use new funds to support the real economy that needs support. At the same time, internet finance can improve efficiency.â€
Policymakers recognize that moving money from financial vacancies to the real economy is just the first step. Only by addressing the distorted credit structure can they ultimately act on China’s economic restructuring, upgrading, and transformation.
Jia Kang, director of the Treasury Department of the Ministry of Finance, told the *Economic Observer* that China currently has more than 103 trillion yuan in broad money. Distributing such a large amount reasonably is not only about large enterprises and real estate, but also about SMEs and emerging industries that lack access.
From the investment data perspective, real estate and infrastructure remain the main drivers of investment in the first half of the year. In the first five months, real estate investment grew by 20.6%, two percentage points higher than the same period last year. Infrastructure investment also continues to grow steadily, while industrial investment, representing production companies, is declining.
Officials from the Economic Operation Monitoring and Coordination Bureau of the Ministry of Industry and Information Technology believe that in recent years, bank funds have either been idle in the financial system or invested in large enterprises, real estate, and local government financing platforms. Most SMEs still lack access to funds or face high financing costs.
Many big companies have not used the money for direct investment. A banker mentioned that many state-owned enterprises have returned funds to the financial sector through trusts and other channels.
Xue Feng, director of the Finance Department of the Shaanxi Provincial Development and Reform Commission, feels that some banks prefer to lend to city investment companies rather than production companies. The bank explained to Xue Feng that the real economy is sluggish, and many enterprises are not profitable. It is better to invest in city investment companies, as this is considered quasi-government debt and generally has no problems.
But the danger is that credit risk in these areas is accumulating. Zhu Haibin believes that the debt ratio of local governments and enterprises has risen sharply in the rapid credit growth in recent years. Financial system deleveraging will increase repayment pressure, potentially leading to a decline in credit asset quality and an increase in non-performing assets.
Zhu Haibin said: “In this sense, the turmoil in the money market last week may be the beginning, not the end, of financial system turmoil in the coming years.â€
**The Bottom Line of Policy Pressure**
Officials from the Economic Operation Monitoring and Coordination Bureau of the Ministry of Industry and Information Technology said that although the central government has emphasized support for small and medium-sized enterprises and the real economy in recent years, compared to the huge lending scale of banks, enterprises have actually received very little. Revitalizing the stock is about bringing money to enterprises.
A person in charge of the banking regulatory bureau told the *Economic Observer*: “Now, banks are clear about what should be withdrawn, but unsure which areas to enter, because some areas know they should be supported, but the risks are relatively high.â€
Science and technology enterprises, affordable housing, cultural and creative industries, and small and micro enterprises are considered investment targets after credit structure adjustments. Tan Weixian, deputy director of the Shanghai Banking Regulatory Bureau, told the *Economic Observer*: “Three years ago, Shanghai’s banking industry was focused on real estate. In the past two years, with the adjustment of Shanghai’s industrial structure, the banking industry has also adjusted its credit structure. We have increased support for small and micro enterprises, affordable housing, and emerging industries aligned with transformational development.â€
Yu Shengfa, president of Hangzhou Bank, said that he should focus on supporting technology-based enterprises and modern service industries. “Technology investment is essential for enterprise transformation. We have established a specialized branch for technology SMEs—Technology Sub-branch. In the service industry, the proportion of customers in commerce and trade circulation in our bank’s credit customers has increased year by year.â€
However, adjusting the credit structure remains a big challenge for banks. The aforementioned central bankers said: “High-risk industries can be priced higher. Now, commercial banks’ pricing power and risk control capabilities have not improved correspondingly, so they continue to engage in seemingly stable financing platforms, real estate projects, etc.â€
Relevant persons from the Ningbo Banking Regulatory Bureau revealed to the *Economic Observer* that it is very difficult for banks to meet the “two no less than†targets for small and micro enterprises in 2013. Reasons include a large base, insufficient credit demand, and poor quality of small and micro enterprises. In Ningbo, banks support more ongoing projects. For example, CCB Ningbo Branch supported 173 ongoing construction projects in Ningbo, with a planned support of 67 billion yuan.
Yang Ping, deputy director of the Investment Research Institute of the National Development and Reform Commission, said that China’s current industrial growth rate is low, and overcapacity in the industrial sector is severe. The demand for these companies’ own loans is not strong. “Revitalizing the stock†is undoubtedly needed to direct money into the real economy, but the government needs to point out a relatively clear new growth point for loans, so that the market can see confidence and encourage banks to participate.â€
Authorities close to the central bank told the *Economic Observer* that “in fact, whether in the money market or the credit market, there is no shortage of funds, but the lack of effective credit demand. The central bank should insist on not releasing water this time. Power is to hope that the Chinese economy will go back to the old road. This is not necessary. We must be brave in adjusting, or we will miss too many opportunities.â€
According to officials from the Economic Operation Monitoring and Coordination Bureau of the Ministry of Industry and Information Technology, the bottom line of high-level tolerance for the real economy is that there is no big problem in employment. This is the last step in the decline of the real economy. Central bank officials said that this time, the attitude of the State Council and the central bank is still relatively firm, hoping to complete the adjustment. If there is market volatility in the middle, which may lead to systemic risks, the central bank will take certain measures. Overall, this is a dynamic process. A balance is reached in the game. The central bank does not want to take the old road. This time, the State Council has this determination.